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Investors Should Focus on Trading Momentum Rather than Worry about Valuations in Big Tech Stocks
The Market's Resilience Due to Significant Positions in Tech Giants
Patrick Armstrong, the chief investment officer managing the Plurimi AI Global Equity Strategy, suggested that investors should focus on trading momentum instead of worrying too much about lofty valuations in Big Tech stocks. Despite the near-15% rally this year in the S&P 500 powered by the tech sector, Armstrong stressed that he had no plans of selling Big Tech. He believes that market momentum plays a significant role in investment decisions despite shaky fundamentals for many companies and economies. Armstrong has maintained mega-cap tech stocks that have been the driver of returns for his portfolio and the market, including Microsoft, Apple, Adobe, Fortinet, and ASML.
Great Momentum Behind Tech
Armstrong stated that there's great momentum behind tech giants. He understands why people want to own them, and he isn't pounding the table on owning these stocks today. However, he plans to let it run despite discomfort about these expensive valuations. Armstrong's significant positions in tech giants are due to their narrative, why people want to own them, and understanding the market momentum behind them.
Becoming Dead Money in a Recession
Armstrong believes that the market's resilience is due to investors feeling overly secure in the stocks driving the rally. The recent tech rally could become a period of stagnation if the economy slips into a recession. Big Tech stocks could become dead money while they try to grow into their lofty valuations. Armstrong has also highlighted that there are risks in other parts of the technology sector. He revealed that he has short positions in electric car makers Rivian and Nio, and German online food delivery firm Delivery Hero.
Understanding the Market's Momentum
Armstrong stressed that understanding the market's momentum played a major role in his investment decisions. He said that the biggest mistakes in his career were selling when things got too expensive, and it became even more expensive later. Armstrong has suffered from doing that. He sold a lot of companies in 2017 but bought them back in 2018. Armstrong has maintained these mega-cap tech stocks that have been the driver of returns for his portfolio as he can gauge the narrative and why people want to own them.
Short Positions in Electric Car Makers and Delivery Hero
Armstrong warned that there were risks in other parts of the technology sector. He revealed that he had short positions in electric car makers Rivian and Nio, and German online food delivery firm Delivery Hero. He believes that these are companies that benefit from a tech rally and AI, but the narrative is not stronger than the fundamentals. Armstrong is content with owning mega-cap stocks that produce lots of cash flow by buying back shares, but he doesn't buy disruptors that are going to grow into incredible market caps without earnings.
New businesses looking to enter the tech sector should take note of Patrick Armstrong's advice to focus on market momentum rather than worrying too much about lofty valuations in big tech stocks. While the tech sector has been driving significant returns in recent years, it's important to understand that this momentum could come to a halt if the economy slips into a recession. As Armstrong warns, big tech stocks could become dead money while they try to grow into their lofty valuations.
Furthermore, investors need to balance narrative with fundamentals. Companies that benefit from a tech rally and AI need to have strong fundamentals to avoid becoming part of a stagnant market. Armstrong's short positions in electric car makers Rivian and Nio, and German online food delivery firm Delivery Hero, show that investors need to be careful about emerging disruptors without strong earnings.
New tech businesses will need to consider these factors before entering the market, balancing short-term momentum with long-term fundamentals. They should also keep an eye on economic conditions and adjust their strategies accordingly. As Armstrong stresses, understanding the market's momentum plays a major role in investment decisions, and those who can gauge both narrative and fundamentals will be well-positioned for success.
